Windfall Profit Tax: Been There, Done That
The jig is up and Americans need to feel the message (down to their pocketbooks) that our habits, and the way we waste energy and oil resources has to change. Nobody cares about oil politics and supply shortages until it directly affects us, so be thankful that so many Americans have been directly affected. It’s the only wait to shift mainstream consciousness to focus on this issue. Everyone is looking for an easy way out and of course, someone to blame, when the pointed fingers can be directed only at ourselves. Gas prices in the United State are too low in my opinion. In other countries, such as Europe, the taxes levied on oil resources result in much higher than the prices Americans have recently seen at the pump. And guess what? In many parts of Europe, they’ve reinvested that extra revenue in their public transit system and alternative energy resources, resisted high levels of surburban sprawl, maintained much of structure and city planning that existed in historical eras and they’ve never had such an extravagant love affair with gaz guzzling SUVS. You’ve all noticed that the cars in other countries tended to be amusing small…well looks who’s laughing now America! Americans need a wake up call and the shift in economic factors where demand is starting to exceed oil supplies, is just the wake up call we need.
I’m not a fan of taxing windfall profits, but I am in support of reducing the tax breaks that oil companies currently receive from the government. There’s a difference there. Tax breaks make sense to a certain extent when they are given to encourage growth in new companies/industries and when core American industries are temporarily struggling, but with the profits oil companies are posting lately, there is no sane rationale for continuing to hand over the tax dollars of hard working citizens to oil companies. That’s what Americans should be calling for, especially in a time when our budget deficit is spiraling out of control and we are looking for ways to reduce it. I’m also a favor of restructuring corporate taxation in general and not just with regards to oil companies. I believe a disproportionate weight of the tax burden is being worn by average citizens, as opposed to large multinational corporations who are in a better position to pay this tax burden and whose business model and retail prices do not reflect all of the indirect and negative social effects incurred when bringing their product to market. Put those type of petitions in front of me and I’ll sign them, but I’m not a fan of this windfall profit tax nonsense.
Windfall Profits Tax: A Historical Perspective
In 1980 Congress enacted the WPT when it ended oil price controls. The controls were a remnant of President Richard Nixon's general wage and price freeze, implemented in 1971. While most of Nixon's price controls expired in 1973, Congress extended oil regulation through 1981. Worried over the rising cost of home heating oil as well as a general run-up in world petroleum prices, legislators decided to keep a lid on domestic oil prices.
From the start, opponents worked tirelessly to abolish oil price controls. Most plans for repeal included some sort of windfall profit tax, either as a sop to disaffected lawmakers or as part of a genuine effort to balance the scales of economic justice. In 1974 President Gerald Ford proposed such a compromise, and the Senate Finance Committee approved a version of the WPT in 1975. Ultimately, however, it fell to President Jimmy Carter to make the bargain stick. In April 1979 he introduced plans to lift price controls gradually over the subsequent 18-month period. In tandem, he offered a new tax on oil production. "Unless we tax the oil companies, they will reap huge and undeserved windfall profits," Carter declared in a nationwide address. Americans had a right to recapture some of that windfall and put it to good use. Carter suggested that the revenue be earmarked for mass transit, oil price relief for poor families, and the development of alternative energy sources.
Supporters of the WPT believed that deregulation would deliver enormous profits into the greedy hands of a rapacious oil industry. Sound familiar?
In the late 1970s, oil prices were expected to increase dramatically once controls disappeared. Regulated prices were pegged as low as $6 per barrel, while global prices had climbed to almost $30. According to the Joint Committee on Taxation, lifting the price controls would produce $1 trillion in new revenue for oil producers between 1980 and 1990. Profits were expected to rise by more than $400 billion over the same period.
Many lawmakers considered such an increase wholly unjustified, especially since many Americans were already struggling with higher energy bills and occasional shortages. Prices had already climbed dramatically over the previous decade, a result of the OPEC oil embargo, the Iranian Revolution, and a continuing increase in demand. In the face of so much consumer pain, oil companies could not be allowed to pocket their enormous profits. Some sort of tax was necessary to stem the "immense transfer of cash" from consumers to oil companies, declared The New York Times. "Legislators who sit by idly while oil profits soar will have to answer to the voters," the editors warned.
Some advocates of the WPT believed that Americans had a right to share in oil company profits; when the nation's natural resources were exploited, some of the earnings belonged to the people. Advocates also contended that oil companies were shirking their fiscal responsibilities. The industry was blessed with low effective tax rates, largely as a result of two key preferences: the percentage depletion allowance and the expensing of intangible drilling costs. The WPT would help offset such unjustified -- and controversial -- subsidies.
Finally, noted CRS analyst Lazzari, budgetary pressures made any new revenue source very attractive. Between 1961 and 1979 the federal budget had run a deficit in every year but one. With preenactment revenue projections for the WPT running at roughly $225 billion for 1980 to 1991, money was a vital consideration.
By 1988, though, opposition had grown to a fever pitch. The tax eventually succumbed to its own disappointing results. It had proven to be a heavy administrative burden, both for taxpayers and the IRS. Oil industry representatives claimed annual compliance costs of $40 million to $50 million. Press reports suggested the IRS was spending as much as $15 million to collect the tax. Overall, it was a heavy cross to bear, complained oil executives. In 1984 a General Accounting Office report called the WPT "perhaps the largest and most complex tax ever levied on a U.S. industry."
Worse, the tax had yielded less revenue than anticipated throughout its existence -- and none at all in its later years. Oil prices had failed to continue their dramatic rise; between 1980 and 1986, they had fallen from $30 to just $10 per barrel. Meanwhile, the WPT's "base price" -- used to calculate tax liability -- had continued to rise with inflation, as required by law. Squeezed from both sides of the equation, the tax had become a negligible source of revenue.
In its eight years of existence, the WPT raised $79 billion in revenue, the CRS later reported. But since those payments were deductible against income, affected companies enjoyed a lower burden under the regular corporate income tax, effectively reducing the net yield to about $40 billion -- a far cry from early hopes.
In August 1988 Congress agreed to repeal the tax. Few mourned its passing. "Time for the windfall tax to fall," declared its erstwhile champions at The New York Times. Events had overtaken the levy, as so often happens with narrow taxes designed to deal with transient phenomena. Did oil companies deserve to keep their windfall profits? "It was a resentful question when Americans waited two hours in gasoline lines and Saudi princes summered in Monaco," the Times recalled. "It seems almost quaint now."